4.2. Improving the Appointed Representatives Regime
Why is it important?
The Financial Conduct Authority (FCA) continues to put strong focus on ensuring products and services are delivering fair outcomes for consumers. More recently, the FCA’s Business Plan for 2022/23 noted the role of Appointed Representatives (ARs) would also be an area of focus, recognising a range of harm across all sectors where firms have ARs, often due to limited due diligence before appointing an AR and have a lack of robust ongoing oversight. The FCA launched consultation paper CP21/34: Improving the Appointed Representatives regime, in December 2021 to propose changes to the AR regime. His Majesty’s Treasury (HMT) also published a call for evidence on how market participants use the AR regime and how effectively the regime works in practice. Both consultations closed on 3 March 2022. Specifically, the FCA ‘s consultation paper proposes updating the AR regime to require Principals to provide additional and more timely information on their ARs and seeks to clarify and strengthen the responsibilities and expectations of Principals. Given the focus of the Regulator on ARs and the additional reporting requirements, it is important that Internal Audit teams consider focused assurance activity in this area, particularly in the robustness of a firm’s supervision and oversight framework, and readiness to obtain sufficient data and information required under the proposals.
What’s new?
- The AR regime was originally established to allow regulated activities to be undertaken by firms and individuals without the need to be directly authorised with the FCA. The regime is based on a Principal firm (which is authorised with the FCA) taking responsibility for the conduct of the AR. The CP 21/34 proposals looked to strengthen Principals' oversight of ARs and improve the information provided to the FCA in order to reduce potential harm to consumers and ensure that good customer and market outcomes are achieved. The final rules were published during August 2022 via Policy Statement PS 22/11 with implementation due in December 2022.
- The recent FCA Business Plan states the regulator will undertake more “assertive” supervision of high-risk Principals, whilst also continuing to work with HMT on possible legislative changes to the AR regime. The consultation paper builds on previous thematic reviews conducted by the FCA across the Insurance and investment sectors during 2018 and 2019. Significant shortcomings were identified in Principals’ understanding of their regulatory obligations in relation to their ARs, with controls related to regulatory activities of ARs for which a Principal has accepted responsibility being categorised as “inadequate”.
- Furthermore, the FCA found that ARs account for significantly more issues compared to directly authorised firms, with “Principal firms using ARs generating 50 to 400 percent more complaints and supervisory cases”. The reduction and prevention of such harm will be a key focus of the Regulator in the coming months, and complaints data will be a key tool the FCA will use to measure the success of Principals’ monitoring, oversight and management of ARs.
- Ultimately, the FCA want to ensure consumers are better informed through access to improved and quality information on principals and ARs to make good decisions when choosing products or services that best suit consumers needs.
What should Internal Audit be doing?
Area of Focus
Information Reporting Requirements for Principals Working with ARs |
Description
Whilst the FCA already expects firms to have sufficient information and knowledge of the business interests and activities of their ARs, the updated proposals require Principals to provide additional details on their ARs. The additional data and reporting requirements may create complexities for a Principal’s current mechanism for capturing and reporting information on ARs as it is likely firms do not currently capture some of the updated information. One such example is the new requirement to report revenue data for regulated and non-regulated business activities for each individual AR. Internal Audit should review and assess the controls for capturing and reporting such AR information, identifying any gaps in management information, including the current timeliness of reporting of data versus the ability of a firm to report data in line with the updated proposals.
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| Oversight of ARs |
One of the key drivers of harm identified by the FCA is a lack of appropriate oversight of ARs. The FCA have said that in order to better identify problematic ARs and ascertain potential weaknesses in supervision, firms need to review the robustness of their supervision and oversight. This provides assurance that systems are in place to anticipate oversight of ARs to a “comparable standard” of any individual directly employed by a firm and that controls effectively mitigate the risk of AR activities resulting in undue risk to consumers or to market integrity. Internal Audit should pay particular attention to the design and operational effectiveness of ongoing oversight arrangements, which should include but is not limited to, assessing the suitability of a firm’s target operating model to meet the requirement of a firm to have sufficient resources to operate adequate controls and oversight.
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| Complaints |
Firms currently provide complaints data to the FCA in aggregation at a Principal-level. However, the new proposals will require firms to submit complaints data at individual AR level. Firm’s will need to review and assess their complaints handling process, procedures and current reporting arrangements to ensure identification of issues leading to potential or actual harm are addressed by a firm more quickly. Internal Audit should assess the proactivity of the Principal to prevent and mitigate potential harm caused by their ARs.
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